2004 (6) TMI 265 - AT - Income Tax

Summary

Issues:
1. Classification of rental income under 'income from house property' or 'business.'

Analysis:
The appellant, a company engaged in manufacturing and sale of engineering goods, let out part of its factory shed and godown for storage and packing of goods. The appellant claimed the rental income under the head 'business' in its return, along with expenses on staff payment and administrative expenses. However, the Assessing Officer (AO) taxed the income under 'property' and disallowed the claimed expenses, citing the absence of business activity during the year under consideration. The Commissioner of Income Tax (Appeals) upheld the assessment, emphasizing that income from a property, even if commercial, should be taxed under 'property.' The appellant contended that the business was temporarily suspended, not ceased, and referred to previous year's order and legal precedents to support its case.

The appellant argued that the AO did not provide a fair opportunity to present its case regarding the classification of income. The appellant maintained that the business was temporarily suspended, evident from staff maintenance and administrative expenses incurred during the year. The appellant highlighted the substantial increase in staff and administrative expenses compared to the previous year, indicating a potential revival of business activities. Additionally, the appellant pointed out the limited duration of the lease agreement with the tenant, supporting the argument of a temporary suspension rather than a permanent cessation of business.

After careful consideration, the Tribunal found merit in the appellant's case. The Tribunal observed that the substantial expenses incurred by the appellant, coupled with the lease agreement's limited duration, indicated a temporary suspension of business rather than a permanent cessation. The Tribunal opined that the rental income was a result of exploiting a commercial asset and should be classified as business income. Citing legal precedent, the Tribunal directed the AO to reassess the expenditure claimed by the appellant under the head 'business' and afford the appellant an opportunity to substantiate the deductions claimed.

In conclusion, the Tribunal partially allowed the appeal, directing the reclassification of rental income under the head 'business' and instructing the AO to review the claimed expenses for allowability. The decision emphasized the temporary nature of the business suspension and the commercial exploitation of assets as factors supporting the classification of income.